Best Merger of Equals

No deal is easy to execute, but a merger of equals serves as a true testament of two institutions’ commitment to coming together. As the recent deal between BB&T Corp. and SunTrust Banks shows, it calls for compromise on a host of issues, from the composition of management and the board, to the location of the headquarters and the name of the combined entity. This is why executing a merger of equals is so tricky.

“They’re really interesting deals,” says Kara Baldwin, a partner at Crowe LLP. “Some do it really well by taking the best of everyone, and sometimes it’s a harder push.”

Successful mergers of equals adopt the best of both banks. “If you’re wanting to call [a transaction] a merger of equals, then you have to have the mindset that, ‘I’m really open to a better way of doing things,’ as opposed to saying it’s a merger of equals because it sounds good in the press and in the communities,” says Rick Childs, also a partner at Crowe.

For this category, Bank Director focused on deals where the seller comprised at least 80% of the buyer’s assets when the deal closed. Due to the availability of key information, we only analyzed public acquirers. From there, we examined profitability growth, measured through return on average assets, return on average equity and earnings per share; tangible book value growth; efficiency improvement, based on the efficiency ratio and noninterest expense as a percentage of assets; credit quality improvement, based on nonperforming loans as a percentage of loans; and lending efficacy, based on the acquirer’s loan-to-deposit ratio one year after the deal closed.

We also looked at qualitative characteristics, including geographic expansion and other strategic gains, and how the combined entity integrated leadership, both on the management team and the board.

The merger between The Little Bank and Oxford, North Carolina-based Union Banc Corp., creating now $788 million asset Union Bank, in Greenville, North Carolina, tops the category. It’s an example of a merger that combines the best of both. The board includes 11 directors from the buyer and seven from the seller; the acquired CEO, John Burns, became the combined bank’s chief banking officer, and its chief banking officer, David Morgan, became an area executive in the Triangle region, which includes acquired markets in Raleigh and Cary, North Carolina.

The deal closed in July 2017, and rated highly for profitability growth, and efficiency and credit quality improvement.

In the third-ranked deal, the former Bank of McKenney combined with CCB Bankshares to create now $472 million asset Touchstone Bank, based in Prince George, Virginia. The combined entity’s new brand was announced in September 2017, before the deal was completed the following November. “In the past, a touchstone was used to test the purity of gold and silver. Today, anything that tests the standard of quality is considered a touchstone,” said Touchstone CEO James Black, in a press release. “The name is a perfect cultural fit for our new community bank and represents the quality standards upon which we will operate.”

Eight former McKenney board members and six former CCB directors form the current board. The deal also offered former McKenney CEO Richard Liles the chance to retire, passing the torch to Black, who led CCB. Liles remains chairman.

The merger rated highest for credit quality improvement.

Montebello, New York-based Sterling Bancorp’s merger with $14 billion asset Astoria Financial Corp., based in Lake Success, New York, ranked second, scoring highly for efficiency improvement and tangible book value growth.

In terms of taking the best of both organizations, the deal is the least “equal” of the ones we examined. The transaction was largely financial, with $30.1 billion asset Sterling gaining low-cost core deposits and 88 branches in Long Island. Thirty-three locations were closed as of July 2019, with plans to shutter another 12 within the next year. Astoria’s mortgage portfolio was promptly jettisoned.

McLean, Virginia-based Southern National Bancorp of Virginia’s merger with $1.4 billion asset Eastern Virginia Bankshares, in Glen Allen, Virginia, ranked fourth. Adding Eastern Virginia’s 28 branches to Southern National’s 23 extended the bank’s footprint through Virginia’s most attractive markets, said CEO Joe Shearin in a press release — from Frederick, Maryland, through Washington, in Richmond, Virginia, and continuing through the state into the Shenandoah Valley, Charlottesville and the Chesapeake Bay area. The deal rated well for long-term profitability growth.

Southern National gained a lower-cost deposit base with Eastern Virginia, as well as retail expertise and fee-based products that complemented Southern National’s commercial focus. Georgia Derrico, Southern National’s CEO until the merger, and R. Roderick Porter, its president and chief operating officer, now serve as executive chairman and executive vice chairman, respectively. Shearin, from Eastern National, was named CEO.

Finally, Bar Harbor Bankshares’ merger with $1.6 billion asset Lake Sunapee Bank Group, in Newport, New Hampshire, scored well for short-term profitability growth and credit quality improvement. The result created a $3.6 billion asset northern New England franchise that expanded the Bar Harbor, Maine-based bank’s presence in New Hampshire and extended its reach into Vermont.

The time frame examined for the best merger of equals category — Jan. 1, 2017, through June 30, 2018 — was particularly strong for mergers of equals, says Childs. Banks were seeking to gain scale or reach significant thresholds, like the $10 billion asset mark. A stronger economy and higher valuations for bank stocks also made those deals more attractive. Today, that interest has waned — though recently announced mergers like that between $43.7 billion First Horizon National Corp., based in Memphis, Tennessee, and $31.7 billion IBERIABANK Corp., based in Lafayette, Louisiana, prove that these deals are still attractive under the right circumstances.

How They Ranked: Best Merger of Equals

ACQUIRER NAME, LOCATION / ASSET SIZE TARGET NAME, LOCATION / ASSET SIZE DEAL DATE SCORE
1 Union Bank
Greenville, NC / $788 million
Union Banc Corp.
Oxford, NC / $351 million
Jul. 7, 2017 2.47
2 Sterling Bancorp
Montebello, NY / $30.1 billion
Astoria Financial Corp.
Lake Success, NY / $14 billion
Oct. 2, 2017 2.69
3 Touchstone Bank
Prince George, VA / $472 million
CCB Bankshares
South Hill, VA / $213 million
Nov. 10, 2017 3.01
4 Southern National Bancorp of Virginia
McLean, VA / $2.7 billion
Eastern Virginia Bankshares
Glen Allen, VA / $1.4 billion
Jun. 23, 2017 3.35
5 Bar Harbor Bankshares (BHB)
Bar Harbor, ME / $3.6 billion
Lake Sunapee Bank Group
Newport, NH / $1.6 billion
Jan. 13, 2017 3.37

SOURCES: S&P Global Market Intelligence, bank filings